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5 Financial Tips to Persevere Through 2017 and Beyond

Bankrolled liquid working capital compiled during boom times can smooth out the current rough edges.

It’s not as fun to farm these days as it was four years ago. Since 2013, real net farm income has declined almost 30%, according to USDA-ERS data.

Still, there are ways to persevere through the current price slump. 

“We have a tendency to believe what happens in the short run will happen in the long run,” says Alan Tubbs, chairman and CEO of Ohnward Bancshares in Maquoketa, Iowa. “Markets overreact, both on the high and the low side. This creates bubbles and troughs. So, we have to anticipate it. High prices correct high prices, and low prices correct low prices.”

Here’s what Tubbs and others had to say at this week’s Iowa State University Soil Management and Land Valuation Conference. 

1. Paying income taxes hurts.

Lack of working capital hurts worse. Having working capital gleaned from the windfall years earlier this decade helps a lot. During the boom years of 2010 to 2013, many farmers gleaned handsome six-figure incomes, says Tubbs. 

One way to dodge the income taxes on those booming incomes was to use Section 179 of the IRS tax code to deduct the full purchase price of qualifying equipment and/or software purchased in the same year. This enabled some farmers to significantly cut their tax bill that year. 

In the meantime, though, this used up working capital they could have now tapped to smooth out this current rough spell.

2. Curb excessive cash rents.

“We have some producers who have long-term loyal relationships (with landlords) built over time,” says Mike Hein, vice president of the Liberty Trust and Savings Bank in Durant, Iowa. 

Others, though, have shorter, more bottom-line driven agreements with landlords that sport high cash rents. 

“Producers are reluctant to give up those farms, so they subsidize losses on that high-priced ground from profits they make on more economically priced ground,” says Hein. 

However, Hein expects downward pressure on those higher cash rents in his area. 

3. Pay attention to volatile markets. 

“Agriculture continues to go through up-and-down cycles,” says Hein. “But one thing that has changed is volatility. Our markets can move dramatically in a short space of time.”

One example occurred in late 2015, where cattle prices dropped $20 per hundredweight (cwt) from November 1 to December 15 and rounded up $15 per cwt by December 31 of that year, he says. 

4. Get ready for interest rate hikes.

They already are creeping upward. Justin Septer, regional vice president of Farm Credit Services of America in Ottumwa, Iowa, says short-term interest rates revolved around 3.25% from December 2008 to December 2015. As of mid-March this year, they were up to 4%. 

Since 1790, interest rates have tended to move in 30-year increments, he adds. Since interest rates have trended downward since the early 1980s, odds are the recent higher trend will continue, he says. 

5. Watch family expenses.

That’s tough, particularly with skyrocketing rates of health insurance premiums among independent business people like farmers, Hein says. In Iowa, that’s been exacerbated by the exit of several large health insurance providers from the private market, he adds. 

Then again, he has customers who are just plain frugal. “I don’t know how they can stay living on what they live on, but they enjoy it,” he says.

At the other end of the spectrum are farm families who have six-figure living expenses. “As long as they can afford to live on that lifestyle, more power to them,” says Hein. “But they have to reel it in when they are having tough times.”

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